The Cayman Islands government plans to pay off more than half of its existing $500 million public debt within the next three years, according to budget documents released last week.
If all occurs as forecast in the administration’s Strategic Policy Statement, central government debt balances will reduce from $503 million, as of mid-2016 to about $264 million by 2019. The amount does not include debts held by separately operating statutory authorities and government-owned companies, which account for another $100 million owed.
The practical effect of the debt payoff, according to financial statements reviewed by the Cayman Compass, is that the public sector will spend far less in interest each year on its existing loans.
Next year, the local government is expecting to pay nearly $24 million in interest to service its outstanding debts. However, by 2019, that interest payment is expected to drop to $11.5 million.
To make the debt repayment by 2019, government will have to substantially reduce its available cash balances. Basically, Cayman will have about $150 million less available in 2019 than it has now. However, it is estimated there will still be more than $230 million left in cash and cash equivalent accounts by the end of December 2019, according to financial statements released last week.
In order to make a massive debt repayment of approximately $360 million over the next three years, Finance Minister Roy McTaggart said the government will borrow money to refinance part of the amounts owed.
The largest single loan is a “bullet bond” that was taken out in 2009 to help pay for certain operating costs and construction projects when Cayman was in an economic downturn. That $261 million loan is due – in its entirety – in November 2019.
A portion of what is owed on the bullet loan, about $130 million, will be borrowed. The remainder of the $360 million debt payments will be funded out of government’s cash surplus.
“This borrowing will be specifically for this purpose and no loan proceeds will be used to finance operating activities or capital investments,” Mr. McTaggart told the Legislative Assembly last week.
The finance minister also noted that government would not use so-called bullet loans in the future. Those are borrowings that come due all at once when loan period ends.
“The government has learned from its experience with the 2009 bond,” he said.
Partly as a result of the aggressive loan repayments and partly due to increased spending on capital projects, the government will have less leftover cash – known as an operating surplus – at the end of the next three years, according to forecasts.
Between 2013 and last year, operating surpluses, the different between what government earns and what it spends, were typically more than $120 million each year.
These surpluses are forecast to go from $69 million in 2018 to about $42 million in 2019, according to budget estimates.